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Daam hai ya Hawai Jahaz? A guide to Rising Inflation

Can we even call ourselves Indians if we’ve never heard our parents say “Hamare zamane me 10 rupay me najaane kya kya aa jata tha”(In our times we could get so many things from just 10 rupees) Well, they were correct to say that, if we compare the prices of simple commodities, then and now there is a stark difference that cannot and should not be ignored.

Let’s take an example, a plain vada pav 5-8 years back would’ve cost you about Rs10 now the same costs around rs20. Which is about a 100% change in the cost of the very same Vada Pao. Did the size of its increase, or did the patty ingredients change? So what is the real reason for the change in the price? Well, the answer is simple: Inflation.

In layman’s terms, inflation refers to a general increase in the price of goods and services or a decrease in the purchasing power of a currency. As a currency loses its value the prices go up and the same amount can then buy fewer things. With increased prices, you would be forced to take a dip into your savings intended for other purposes and your goals in the long and short term and be jeopardized, if you do not take the necessary actions to plan and protect your hard-earned money.

So how can you tackle this invisible enemy? Before understanding the rules of combat let us first try to understand our opponent.

The government measures inflation in terms of CPI: Consumer Price Index. CPI is calculated by the government. It theoretically puts together a basket of Goods and Services that are considered essentials; and it may include food, transport, medical services, etc, price changes of each item are noted and then averaged out based on their weight in the basket. Essentially inflation is the change in the CPI from month to month and year to year.

Aam Aadmi And Inflation:
From the basic understanding of inflation, we can conclude that no one can be spared from its effects. To understand it more clearly let us see certain examples to grasp the concept better.

Being in an Indian family comes with its own share of fun, most of the times when relatives visit each other it is an unspoken tradition to give some cash to the younger ones in each other’s families. Now imagine the year 1991, relatives come over to your place and give you and your siblings 2rs. each, you go out to the nearest shop and have yourself a party carefully allocating your spending to get a Pepsi, 2 biscuits and some sweet treats.

Now fast forward to 2019, someone comes to your house and gives you 2rs., you’ll probably start wondering about the other persons sanity.

Earlier 2rs would be a lot because things were very cheap. The only thing that you would get from 2rupees today is a toffee, sometimes 2 if you’re lucky. What does this tell us? It tells us of the fact a general increase in the prices of commodities has reduces our purchasing power. The same 2 rupee is now worth less then what it was a decade or so earlier.

Now too we are looking at the prices of petrol reaching rupees 90-100 to many states which will have a direct impact on transportation costs and indirectly affect prices of commodities that are transported from one place to another. And that is the essence of Inflation. Reduction in the number of things you can buy for the same amount that would earlier fetch you a greater number of things. A common man plans for his children’s education, marriage, retirement allocation and a lot more for his long-term financial plans. These goals are for the future, and as we have made it clear, prices rise with time. And in future, things will only become costlier. So, along with inflation fluctuations, your goals and plans should be constantly reviewed and adjusted.

A thing to worry About
With Inflation, you can never be sure about the price rise for every commodity. Inflation on education will differ from inflation of consumables. And inflation in leisure goods will differ from inflation in the healthcare industry. So how do you plan out your finances?

The rise in prices of commodities will ultimately reflect in the prices of daily-use commodities. For example, a rise in commodity fuel will increase transport costs; a rise in prices of raw materials used in production will put upward pressure on the prices of the final products. As per a CRISIL Report, such a price rise borne by the producers shall be passed on to the consumers.

To understand that, it is important to understand what are the causes of inflation. Inflation can be divided on the basis of its cause. The Types of Inflation are:

There are mainly 3 types of inflation:
1. Demand-pull Inflation:
Price appreciation is due to the disparity between the demand of goods and services and their supply. An inherent increase in demand causes price appreciation. The most significant example of Demand-Pull inflation is oil. Oil which is a limited resource has seen the demand rise exponentially over the last decades, but as the supply cannot be increased its price is now three times what used to be years back.

2. Cost-push Inflation:
Due to an increase in the cost of the inputs such as raw materials, capital, and labour; the final product undergoes price appreciation. Ideally putting that India is somewhat facing a Cost-Push Inflation, where the high input prices are being reflected in the high prices of the final product.

3. Built-in Inflation:
Built-in Inflation is a situation where workers expect their salaries/wages to rise, to cope up with the inflation that has spread in the economy.

To counter this evil of inflation, it is important to keep an eye on the market and the financial causes of inflation to be able to handle your finances well.

  • Plan and be sure of all your long-term and short-term goals.
  • Keep an eye on the cost of your goal every once in a while.
  • Start saving for your goals.
  • Be prepared for the nasty inflation rates to increase.

Inflation like an invisible evil is rising again whether we like it or not. Rising prices of edible oils, fuels, and metals are key driving forces behind it. Prices of essentials have risen, so there is virtually no one who will not be impacted. With the prices of oil showing a 30.84% y-o-y increase combined with an 11.58% y-o-y increase in fuel and electricity and a 9.38% price rise for pulses, the budgets are already blown all out of proportions for the common man. With Brent Crude prices crossing $70 per barrel in the past weeks, the effects of global inflation are also seeping into emerging economies through commodities.

The rise in prices of commodities will ultimately reflect in the prices of daily-use commodities. For example, a rise in commodity fuel will increase transport costs; a rise in prices of raw materials used in production will put upward pressure on the prices of the final products. As per a CRISIL Report, such a price rise borne by the producers shall be passed on to the consumers.

Some other steps that you can partake to protect yourself from the surprises of inflation are:

  • Invest in Equities- Equity instruments provide better risk-adjusted returns as opposed to banks in which the interest rates on deposits are usually much less than the inflation rate prevalent in the economy.
  • Invest in Gold-. Though not popularly held in physical form, Gold ETS’s are gaining popularity in the portfolio as a lucrative investment. When the bear phase prevails in the market, having gold exposure not only makes the portfolio safe but also helps to neutralize the effects of poor-performing investments.
  • Know Your Inflation Rate-Personal inflation rate might differ from person to person as consumption pattern varies from household to household. Therefore, it becomes necessary to calculate your inflation rate keeping in mind the inflation rate for various commodities that you consume. By monitoring the expenses and knowing how you are actively affected by inflation you will get a clearer picture of how to manage the funds.

Inflation like an invisible evil is rising again whether we like it or not. Rising prices of edible oils, fuels, and metals are key driving forces behind it. Prices of essentials have risen, so there is virtually no one who will not be impacted and no one who can predict it. You can only hope to be able to save more than the rise of inflation. So, it doesn’t put a hole in your savings and income. Always keep an eye on the market and the rates of inflation to live a financially protected life.

Manoj Amarwal
Saarthi Dream
Saarthi for financial dreams